Tag: well-being

How to get the most from your money? This is the question posed by the linked article below. It’s a topic we’ve looked at in previous posts, such as Studies show that money can buy happiness (but only if you spend on experiences), Happiness economics and Peak stuff. This article takes the arguments further.

It suggests that, up to a certain level of income, there is a roughly linear relationship between money and life satisfaction. As poor people have more to spend, so they can begin to escape poverty and the negative features of financial insecurity and a lack of basic necessities, such as food and shelter. They also gain a greater freedom to choose what and when to buy. Beyond a certain level, however, the rate of increase in life satisfaction tends to decline, as does the specific pleasure from additional individual purchases. In economists’ language, the marginal utility of income diminishes.

But the article goes further than this. It suggests that satisfaction or happiness is of two broad types. The first is the general sense of well-being that people get from their life. This tends to be relatively stable for any given person, but will tend to increase as people have more money to spend or have more fulfilling jobs. Of course, there may well be a trade-off between income and job satisfaction. Some people may prefer to take a cut in pay for a more fulfilling job.

The second is the satisfaction or happiness you get from specific experiences. This tends to fluctuate on a day-to-day basis, depending on what you are doing. Here, what you purchase and the use you make of the purchases is a key component.

So what lessons are there for earning and spending money wisely? To start with, it is important to get a good work-life balance. It may be worth trading income for job satisfaction. Here the focus should be on long-term fulfilment, rather than on the short-term happiness from more ‘stuff’. Then it is important to spend money wisely. Here the author identifies three lessons:

The first is to consider buying time. Time-saving purchases, such as dishwashers can help. So too can ‘outsourcing’ activities, such as cleaning, laundry, cooking, DIY or child care, if they give you more time to do other more fulfilling things (but not if you love doing them!).

The second is to spend more money on experiences (as we saw in the post Studies show that money can buy happiness (but only if you spend on experiences). A better TV or car may seem like a wiser investment than more dinners out, holidays or going to concerts. But we quickly adapt to new upgraded ‘stuff’, thereby eliminating any additional satisfaction. Experiences, however, tend to linger in the memory. As Tom Gilovich, a psychology professor at Cornell University, is quoted by the article as saying:

Even though, in a material sense, they [experiences] come and go, they live on in the stories we tell, the relationships we cement, and ultimately in the sense of who we are.

Choosing a more fulfilling but less well-paid job is a form of spending money on experiences.

The third is to give some of your money away, whether to charity or to helping friends or relatives. As Gilovich says:

It’s hard to find a more charming finding than that by giving away money, you not only make someone else happier, you make yourself happier.

Article

Questions

  1. What is meant by ‘diminishing marginal utility of income’? Is the concept consistent with the arguments in the article?
  2. In what sense may it be rational to choose a lower-paid job?
  3. Is ‘happiness’ the same as ‘utility’ as the concept is used by economists?
  4. Does the concept of ‘peak stuff’ apply to all physical products? Explain your answer.
  5. If giving money away makes a person happy, is it truly altruistic for that person to do so? Explain.

A key economic objective of governments around the world is economic growth, where economic growth is taken to mean growth in Gross Domestic Product (GDP). This can be refined as growth in GDP per head or growth in Net National Income (NNY or NNI) – this takes account of depreciation and net flows of income to and from abroad. But is GDP (or NNY) an appropriate measure? There continues to be much debate about this and there is a lot of support for adopting an alternative measure – the Genuine Progress Indicator (GPI) as a target for economic policy.

GDP measures the market value of production and is the value added at each stage of production. If the value of a nation’s production is what you want to measure or target, then GDP is quite a good indicator. Its main drawbacks are that it uses market prices, which may be distorted, and that much of production in the informal sector is not included.

But if GDP growth is taken to be a proxy for development or growth in wellbeing of the residents of a country, then it has serious shortcomings. This is not to say that GDP gives no indication of progress. Generally, countries with higher GDP per head have a better standard of living, but it is not necessarily the case that, if Country A has higher production in the formal sector than Country B, its residents will be happier, more fulfilled and have fewer economic or other problems.

GDP, by focusing on production, ignores many environmental and social costs of that production. Valuable but not tradable resources, such as clean air, rivers and oceans, may be sacrificed for the sake of extra production and this is recorded as a gain in GDP.

Similarly, unless GDP is specifically weighted by income groups, which virtually never happens, it does not take into account income distribution. Much of the growth in production in both rich and poor countries in recent decades has gone to the richest people. Take the case of the USA. In 1944 the share of income going to the top 1% share was 11.3%, while the bottom 90% were receiving 67.5%. Such levels remained roughly constant for the next three decades. But then things began to change.

Starting in the mid- to late 1970s, the uppermost tier’s income share began rising dramatically, while that of the bottom 90% started to fall. The top 1% took heavy hits from the dot-com crash and the Great Recession but recovered fairly quickly: [preliminary estimates for 2012 by Emmanuel Saez] have that group receiving nearly 22.5% of all pre-tax income, while the bottom 90%’s share is below 50% for the first time ever (49.6%, to be precise).

So what does GPI measure and why may it be a better target for policy-makers than GDP or NNY? The answer is that it includes a number of important items that affect the well-being of a country, such as resource depletion, social activity and income distribution, that are not measured in GDP. So what would cause GPI to rise? According to The Guardian article below, examples would include:

Getting more energy from renewables; increased energy efficiency; reducing the income gap; putting more reliable, durable products on the market (have you heard of planned obsolescence?); volunteering more for your community; preserving wetlands, forests, and farmland; shorter commutes and transport routes. In fact, there are 26 ways the GPI can go up, all measured in dollars that boil down to a single number.

GPI is being increasingly adopted as a measure of progress. In the USA, it is officially used in Vermont and Maryland and is being considered in other states, such as Hawaii, Washington and Oregon.

And there are other alternatives. For example, since 1990, the United Nations Development Programme (UNDP) has published an annual Human Development Index (HDI) As Box 27.1 in Economics, 8th edition states:

HDI is the average of three indices based on three sets of variables: (i) life expectancy at birth, (ii) education (a weighted average of (a) the mean years that a 25-year-old person or older has spent in school and (b) the number of years of schooling that a 5-year-old child is expected to have over their lifetime) and (iii) real GNY per capita, measured in US dollars at purchasing-power parity exchange rates.

The following articles look at the suitability of GDP and GPI and whether, by targeting growth in GDP, governments are guilty of downplaying the importance of other economic and social objectives.

Beyond GDP: US states have adopted genuine progress indicators The Guardian, Marta Ceroni (23/9/14)
Forget the GDP. Some States Have Found a Better Way to Measure Our Progress. New Republic, Lew Daly and Sean McElwee (3/2/14)
Gross domestic problem Aljazeera, Sean McElwee (6/6/14)
Creating the Circular Economy, Part II Environmental Leader, David Dornfeld (17/9/14)
Development: Time to leave GDP behind Nature, Robert Costanza, Ida Kubiszewski, Enrico Giovannini, Hunter Lovins, Jacqueline McGlade, Kate E. Pickett, Kristín Vala Ragnarsdóttir, Debra Roberts, Roberto De Vogli and Richard Wilkinson (15/1/14)
The Problems With Using GPI Rather Than GDP Forbes, Tim Worstall (5/6/14)

Questions

  1. What does GDP measure?
  2. Does GDP of a country equate to the turnover of a firm?
  3. If growth in NNY is superior to growth in GDP as a measure of economic growth, why are GDP figures more generally used than NNY figures when assessing a country’s economic performance?
  4. How suitable is using GDP as a measure of a nation’s production?
  5. What does GPI measure?
  6. Is GPI superior to GDP as a measure of a nation’s level of development? Explain why or why not.
  7. Give some examples of where a growth in GDP might correspond to a decline in economic well-being.
  8. For what reasons could GPI measures be described as subjective?
  9. Would it be a good idea for a country to target growth in GPI/GDP? Explain your answer.
  10. In addition to real GNY per capita, the Human Development Index includes measures of education and life expectancy. For what other social objectives might education and life expectancy be useful proxies?

Now here’s a gloomy article from Robert Peston. He’s been looking at investors’ views about the coming years and sees a general pessimism about the prospects for long-term economic growth. And that pessimism is becoming deeper.

It is true that both the UK and the USA have recorded reasonable growth rates in recent months and do seem, at least on the surface, to be recovering from recession. But, according to investor behaviour, they:

seem to be saying, in how they place their money, that the UK’s and USA’s current reasonably rapid growth will turn out to be a short-lived period of catch-up, following the deep recession of 2008-9.

So what is it about investor behaviour that implies a deep pessimism and are investors right to be pessimistic? The article explores these issues. It does also look at an alternative explanation that investors may merely be being cautious until a clearer picture emerges about long-term growth prospects – which may turn out to be better that many currently now predict.

The article finishes by looking at a possible solution to the problem (if you regard low or zero growth as a problem). That would be for the government to ‘throw money at investment in infrastructure – to generate both short-term growth and enhance long-term productive potential.’

Note that Elizabeth also looks at this article in her blog The end of growth in the west?.

The end of growth in the West? BBC News, Robert Peston (26/9/14)

Questions

  1. What is meant by the ’25-year yield curve for government bonds’? Why does this yield curve imply a deep level of business pessimism about the long-term prospects for UK economic growth?
  2. What are the determinants of long-term economic growth?
  3. Looking at these determinants, which ones suggest that long-term economic growth may be low?
  4. Are there any determinants which might suggest that economic growth will be maintained over the long term at historical levels of around 2.6%?
  5. Do demand-side policies affect potential GDP and, if so, how?
  6. What policies could government pursue to increase the rate of growth in potential GDP?
  7. What current ‘dramas’ affecting the world economy could have long-term implications for economic growth? How does uncertainty about the long-term implications for the global economy of such dramas itself affect economic growth?
  8. Is long-term growth in real GDP an appropriate indicator of (a) economic development and (b) long-term growth in general well-being?

GDP figures are often a poor measure of a country’s economic well-being. By focusing on production, they may not capture the contribution of a range of social and environmental factors to people’s living standards, including the various negative and positive externalities from production and consumption themselves. A case in point is internet innovation: an issue considered in the first linked article below by the eminent economist, Joseph Stiglitz.

The effects of innovations that directly lead to an increase in output are relatively easy to measure. Many innovations, however, may allow those with power to consolidate that power, resulting in less competition and a possible decline in welfare. If, for example, companies such as Amazon, invest in online retailing and gain a first-mover advantage, they may be able to use this power to drive out competitors. In other words, innovations may not simply lower the cost of production and hence prices: they may even lead to an increase in prices.

Then there are innovations, such as faster broadband, that result in higher quality. While higher quality in one sphere may lead to higher output elsewhere, in many cases it is just improving the experience of consumers without being reflected in a way that can be easily measured.

Some innovations may be judged as socially harmful. Thus improved gaming functionality and realism may encourage people to spend more time online. The social and health implications of this may be considered as undesirable and resulting in a reduction in well-being. Of course, many gamers would disagree!

The point is that technological innovations often result in a change in tastes. These changes in tastes may involve negative externalities, themselves very hard to quantify. Consequently, resulting changes to GDP may be a very poor indicator of changes in social well-being.

The articles below consider some of these issues. The Stiglitz article gives an example of innovation in financial services. Although highly profitable for many working in the sector – at least until the crash of 2008/9 – according to the author, these innovations led to both lower GDP growth and a net contribution to social welfare that was negative.

The benefits of internet innovation are hard to spot in GDP statistics The Guardian, Joseph Stiglitz (10/3/14)
Economist argues for happiness over GDP Yale Daily News, Joyce Guo (19/2/14)
‘GDP: A Brief But Affectionate History’ by Diane Coyle and ‘The Leading Indicators: A Short History of the Numbers That Rule Our World’ by Zachary Karabell Washington Post, Tyler Cowen (21/2/14)
Emerging Markets: Income Returns To Innovation (GDP Per Capita Vs. Innovation Index) Seeking Alphz, Jon Harrison (4/3/14)

Questions

  1. What does GDP measure?
  2. What factors affecting the welfare of society are not measured in GDP?
  3. What alternative indicators are there to GDP as a measure of living standards?
  4. How would you set about measuring the effects on living standards of a technological revolution, such as the ability to access 4G on the move on laptops and smartphones (e.g. on trains)?
  5. How should the net benefits of installing more ATMs (cash machines) be calculated?
  6. Revisit the blog Time to leave GDP behind? and answer question 8.
  7. Referring to the Jon Harrison article, how would you construct an innovation index? How is innovation related too GDP per capita?

GDP is still the most frequently used indicator of a country’s development. When governments target economic growth as a key goal, it is growth in GDP to which they are referring. And they often make the assumption that growth in GDP is a proxy for growth in well-being. But is it time to leave GDP behind as the main indicator of national economic success? This is the question posed in the first of the linked articles below, from the prestigious science journal Nature.

As the article states:

Robert F. Kennedy once said that a country’s gross domestic product (GDP) measures “everything except that which makes life worthwhile”. The metric was developed in the 1930s and 1940s amid the upheaval of the Great Depression and global war. Even before the United Nations began requiring countries to collect data to report national GDP, Simon Kuznets, the metric’s chief architect, had warned against equating its growth with well-being.

GDP measures mainly market transactions. It ignores social costs, environmental impacts and income inequality. If a business used GDP-style accounting, it would aim to maximize gross revenue — even at the expense of profitability, efficiency, sustainability or flexibility. That is hardly smart or sustainable (think Enron). Yet since the end of the Second World War, promoting GDP growth has remained the primary national policy goal in almost every country

So what could replace GDP, or be considered alongside GDP? Should we try to measure happiness? After all, behavioural scientists are getting much better at understanding and measuring the psychology of human well-being (see the blog posts Money can’t buy me love and Happiness economics).

Or should we focus primarily on long-term issues of the sustainability of development? Or should we focus more on the distribution of income or well-being in a world that is becoming increasingly unequal?

Or should measures of well-being involve weighted composite indices involving things such as life-expectancy, education, housing, democratic engagement, leisure time, social mobility, etc. And, if so, how should the weightings of the different indicators be determined? The United Nations Development Programme (UNDP) produces annual Human Development Reports, where countries are ranked according to a Human Development Index. As the UNDP site states:

The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development. The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country stands in relation to these goalposts, expressed as a value between 0 and 1.

HDI is a composite of three sets of indicators: education, life expectancy and income (see). The UNDP since 2010 has also produced an Inequality-adjusted HDI (IHDI).

The IHDI will be equal to the HDI value when there is no inequality, but falls below the HDI value as inequality rises. The difference between the HDI and the IHDI represents the ‘loss’ in potential human development due to inequality and can be expressed as a percentage.

You can now build your own HDI for each country on the UNDP site by selecting from the following indicators: health, education, income, inequality, poverty and gender.

The Nature article considers a number of measures of progress and considers their relative merits. The other articles also look at measuring national progress and well-being and at the relationship between income per head and happiness. It is clear that focusing on GDP alone provides too simplistic an approach to measuring development.

Development: Time to leave GDP behind Nature, Robert Costanza, Ida Kubiszewski, Enrico Giovannini, Hunter Lovins, Jacqueline McGlade, Kate E. Pickett, Kristín Vala Ragnarsdóttir, Debra Roberts, Roberto De Vogli and Richard Wilkinson (15/1/14)
The happiness agenda makes for miserable policy The Conversation, Daniel Sage (9/1/14)
Economic view: No matter what the politicians say, GDP is a distorted guide to economic performance and a bad way to measure prosperity Independent, Guy Hands (28/1/14)
Buy buy love The Economist (22/6/13)
Experts confirm that money does buy happiness – but only up to £22,100 Independent, Jamie Merrill (28/11/13)
Can Money Buy Happiness? Scientific American, Sonja Lyubomirsky (10/8/10)
Money can buy happiness The Economist (2/5/13)
Money can buy happiness Hacker News, pyduan (13/1/14)
Can ‘happiness economics’ provide a new framework for development? The Guardian, Christian Kroll (3/9/13)
The 10 Things Economics Can Tell Us About Happiness The Atlantic, Derek Thompson (31/5/12)
Financial crisis hits happiness levels BBC News (3/11/13)
Happiness study finds that UK is passing point of peak life satisfaction The Guardian, Larry Elliott (27/11/13)
How GDP became the figure everyone wanted to watch BBC News, Peter Day (16/4/14)
Economic development can only buy happiness up to a ‘sweet spot’ of $36,000 GDP per person Science Daily (27/11/13)

Questions

  1. What does GDP measure?
  2. How suitable a measure of economic progress is growth in GDP?
  3. How can GDP be adjusted to make it a more suitable measure of economic progress?
  4. What are the advantages of using composite indicators of well-being?
  5. What difficulties are there in measuring well-being using composite indicators?
  6. Assuming there were no measurement problems, what indicators would you include in devising the optimum composite indicator of well-being?
  7. Can money buy happiness?
  8. Why do life satisfaction levels peak at around $36,000 (adjusted for Purchasing Power Parity (PPP))?